Exagen Inc. (XGN) Q1 2021 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, and welcome to the Exagen Inc. First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn this conference over to your host, Mr. Mike Cavanaugh, Investor Relations for Exagen. Thank you. You may begin.

Good afternoon, and thank you for joining us today. Earlier today, Exagen Inc. released financial results for the quarter ended March 31, 2021. The release is currently available on the Company’s website at www.exagen.com. Ron Rocca, President and Chief Executive Officer; Kamal Adawi, Chief Financial Officer; and Mark Hazeltine, Chief Operating Officer, will host this afternoon’s call. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, including, without limitation, statements regarding our business strategy and future financial and operating performance, including 2021 guidance, the impact of COVID-19 pandemic on our business, our current and future product offerings and reimbursement and coverage are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and descriptions of the risks and uncertainties associated with our business, we see our filings with the Securities and Exchange Commission, including our Form 10-K and subsequent filings. The information provided in this conference call speaks only to the live broadcast today, May 11, 2021. Exagen disclaims any intention or obligation, except as required by law, to update or revise any information, financial projections or other forward-looking statements, whether because of new information, future events or otherwise. I will now turn the call over to Ron Rocca, President and CEO of Exagen.

Thanks, Mike, and thank you to everyone joining the call today. As always, we appreciate your continued support of Exagen. The first quarter of 2021 was an important one for Exagen, and we are very pleased with our accomplishments. One of the many highlights of the quarter was our successful follow-on offering, which raised over $69 million in gross proceeds and added significant additional liquidity to the market for Exagen stock. We plan to use the added capital to further build our business and position the company for sustainable long-term success. We are accelerating our investments to expand our robust pipeline, which includes our molecular and multiomic development initiatives, our lab expansion and commercial organization. We’ve undertaken a major expansion of our laboratory facilities in Vista, California, which will significantly enhance our testing capacity and improve our efficiencies. With their increased investment in research and development, we seek to expand our advice franchise of autoimmune and autoimmune related testing solutions. Our R&D team is working diligently on developing our fibromyalgia test. This liquid biopsy test is being developed to be the first rule-in-rule-out fibromyalgia diagnostic test. This is a very challenging disease with a very large total addressable market. Although it is not an autoimmune disorder, it is often diagnosed by rheumatologists because its clinical symptoms are so similar to those of connected tissue disease. We are also expanding our R&D capabilities to focus on multiomics, by integrating molecular technology with our protein markers. There remains a significant unmet need for approximately 24 million patients suffering from autoimmune diseases. Exagen’s commitment to provide novel differentiating testing solutions with an IP-protected CB-CAPs technology will assist in the expansion of our advice testing franchise for thrombosis, lupus nephritis and rheumatoid arthritis. These investments uniquely position us for continued growth in this large underserved market. Turning to the performance of our business. We recorded a strong quarter in our advice testing franchise. As you are all aware, due to the ongoing pandemic, many patients remained unable to freely visit their health care providers, inhibiting the ability of patients to be tested. Furthermore, there were severe weather conditions in Q1, which impacted our business. Despite these headwinds, our core testing business proved to be resilient and performed very well. We achieved several records in the quarter, including 29,029 tests, 1,763 total ordering health care providers and 659 adopters for our flagship AVISE CTD and AVISE Lupus test. We finished the quarter strong with an all-time record volume in March. We continue to achieve very high retention rates of 99% among these adopters. As we have said before, we believe retention rates this high speak volumes about the value health care providers place on the ability of advice testing to accelerate the historically slow and frustrating process of clinically diagnosing autoimmune disorders. Our Q1 performance in the face of ongoing pandemic and severe weather gives us real confidence around the strength and value of our advised franchise and our path forward as we continue to expand our footprint with rheumatologists, hospital systems and payers across the country. As many of you know, autoimmune disorders are notoriously difficult and time-consuming to diagnose using traditional testing. Our CB-CAPs technology is a true breakthrough that offers a promise of faster and more accurate diagnosis, enabling earlier intervention into treating these chronic, and sometimes deadly, diseases. This month, we announced the research collaboration with an exclusive licensing agreement with Allegheny Health Network Research Institute. The collaboration will focus on the development and commercialization of novel, patented biomarkers for diagnosing, prognosing and monitoring of autoimmune diseases. Importantly, we are happy to be working again with key opinion leaders, Dr. Joe Ahearn and Dr. Sue Manzi. This is an extension of our R&D organization for the discovery and development of novel autoimmune biomarkers. Additionally, our collaboration enables access to AHN’s Autoimmune Center of Excellence, which gives us insights into the latest cutting-edge academic research. We also kicked off 2021 with progress on the reimbursement front, having recently completed covered in network agreements with Highmark, the fourth-largest Blue Cross, Blue Shield group in the country, and TRICARE West. We remain highly engaged and focused on payers to further expand coverage and in-network status. We signed in-network agreements with 2 prominent health care systems in Q1, Tufts Medical Center in Boston and St. Charles Health Systems based in Oregon. Both health systems recognizing the necessity of making more accurate testing accessible to their patients, and we are looking forward to long-term relationships with both. AVISE tests are now available to approximately 67 million in network lives across the U.S., up from approximately 59 million at the end of 2020, and we expect this momentum to continue increasing our footprint and benefiting ASP. I would also like to touch on our commercial excellence, which is a crucial part of our strategy. In Q1, we expanded to 63 territories. We also began to supplement our sales force by creating inside sales positions in Q1. These new positions were added to perform multiple roles, such as covering white space, and augmenting territories to further our reach and frequency with rheumatologists. May is lupus awareness month. As you know, lupus is often overlooked relative to cancer. However, it is a very serious disease, which we are bringing more attention to the timely and accurate diagnosis offered through our AVISE testing. I’m very proud of the ongoing support that Exagen provides to patients throughout the diagnosis and disease management journey. Whether it’s through gaining clarity through their differential diagnosis with AVISE CTD, to regain control the disease management with AVISE SLE monitor or to address the disparity and other obstacles to optimize care. We remain focused on providing patients and their health care providers with the best possible solution for their needs. I would now like to turn over the call to Kamal to discuss our financial results.

Thank you, Ron, and good afternoon, everyone. Total revenues in the first quarter of 2021 were $10.6 million, an increase of 10% over the first quarter of 2020. Total revenues were driven primarily by testing volumes for AVISE CTD, including AVISE Lupus, which grew 7% year-over-year to a record 29,029 tests in the first quarter of 2021. This also includes an all-time record for volumes in March. As Ron mentioned, the number of ordering health care providers was a record 1,763 in the quarter, compared with 1,692 in the first quarter of 2020. AVISE CTD test revenue was $8.5 million in the quarter, and other testing revenue was $1.8 million. Revenue for SIMPONI was $0.3 million in the quarter. Once again, we are pleased with the performance of our core testing franchise in the face of headwinds from the ongoing COVID-19 pandemic and severe weather we saw in February. Positive revenue were $4.7 million in Q1, resulting in a gross margin of 56% compared to 53% in the first quarter of 2020. Operating expenses in the quarter were $16.2 million compared with $14.8 million in the first quarter of 2020. The increase was primarily due to employee-related expenses, including sales incentives, stock compensation and R&D initiatives. The net loss in the quarter was $6.2 million compared with $5.6 million in the first quarter of 2020. For full year 2021, we reiterate the guidance we gave in our Q4 2020 earnings call, and expect total revenues to be approximately $47 million to $49 million. This includes testing revenue of $46 million to $48 million, representing growth of approximately 27% over 2020 at the midpoint of the range. We prioritized resources to our AVISE testing franchise and expect $1.2 million in revenue for SIMPONI n for the full year 2021. Looking to our balance sheet. Cash and cash equivalents as of March 31 2021 were approximately $118.1 million. With the additional capital raised in Q1, we’re making further investments in R&D, including the development of molecular and multiomic capabilities, laboratory expansion and our commercial organization to fuel future growth. We will now open the call for questions.

Our first question comes from the line of Chris Lin with Cowen.

Ron, I want to start with a comment you made during your prepared remarks. Specifically, could you elaborate on your R&D initiative to integrate molecular technologies? I’m curious what type of technology you’re looking to integrate? Is it sequencing, PCR or microarrays? Also, can you talk about the process to develop a multiomic test? Can you leverage your existing patient samples or database?

Sure. First of all, thanks, Chris. Appreciate the question. We are putting a lot of emphasis into multiomics. And the reason is that we’ve done such a great job with proteins, but the reality is when you add markers from RNA to proteins, you should be able to get a more sophisticated earlier diagnosis. And that’s where we’re putting the efforts in. While we look at targets like interferon alpha and so forth to add to our CB-CAPs technology, those studies do take time. So are we looking at next-gen sequence. You’re absolutely right. We are working in that direction, and we’re putting a lot of effort there. The process is going to be one that you’re probably used to when you’re seeing other molecular type testing. It takes sophisticated materials, you have to have geneticists and so forth. And that’s why we put a lot of effort in building out our lab to be able to enable us to do this in an effective manner. So when you think about adding CB-CAPs to a molecular test and getting to that multiomics, that really is what everybody is looking for. Because when you’re talking about autoimmune disorders, it’s very complicated. Your companies that deal with cancer, they’re dealing with a tumor, a known event. Autoimmune is so diverse. When your body starts attacking itself, it really does lend itself to molecular type testing because of what happens as your body turns against itself. So the process is going to be very well thought out. It actually is already, and we have some very good consultants as well there’s geneticists to make sure that process is tight. So when we do have our first multiomic product out on the market, it will be one of high-quality, and it will enable the physicians to help us find a solution for those patients.

That’s great, very helpful. And maybe a follow-up to that. How should we think about the time lines associated with this multiomic test that we’re talking about? I don’t know. Any comments you want to provide on time lines?

Yes. No, as a CEO, I’m always pushing time lines, but I’m also very cognizant of the fact if you push sciences too much, you may not get the product you want. So I put the right amount of pressure on them saying we have to hit these time lines that we have internally. We want to make sure we continue to progress. Now, COVID is dissipating a bit. So we’re getting people enrolled in studies a lot more efficiently than we did, let’s say, in January. And then the end of last year. So that’s one good thing as patients become more willing to participate in some of these studies. The partners we’re looking at are very excited about the way we’re progressing here. So while I can’t give you a definitive time line. I can tell you, I’m doing everything I can to get the highest quality product on the market as fast as I can, but not to the point where I disrupt the scientists from doing the work that they do, which is so important.

Okay. That’s very helpful. Maybe just going back to the quarter. Hoping you could unpack the Q1 performance in a bit more detail. Can you detail where you are seeing the most success in driving the record device volumes is it demand coming from existing customers? Or is it due to new practices coming online? And just along of these lines, I’m also curious if you have seen the benefit of a catch-up in volume as patients perhaps just delay business due to COVID-19 are returning to the office?

Yes. I get the comment at the catch-up in March since it was a record month. But the whole quarter was a record, 29,029. So while the whole quarter really did well, and that shows the power of the solutions that these tests provide. The key metric there that you were asking was, though, how many physicians across the country wrote. And the record number of ordering health care providers was an indication that we grew around the country, 1,763 in the first quarter, with, again, 99% stickiness. So we grew everywhere. You remember that Texas was shut down for, what was it, like 2.5 weeks in February. But those doctors came back as well as all the other doctors in the country. So what we’re finding now, Chris, is that doctors understand CB-CAPs technology. They understand they have a real issue with giving a definitive diagnosis to especially disease like lupus. And that our test is very convenient, one blood draw that tells you whether they got lupus and what other connective tissues they may have that overlap. So we’re hitting the doctors with very convenient, high-caliber test for their autoimmune patients. And it’s coming from all over the country.

Okay. Great. Last question for me. I think you talked about this in your prepared remarks, but could you just provide us a bit more detail on the expanded sales force and the inside sales team. How are those tracking relative to your expectations?

Yes. No problem. So yes, we expanded the sales force. So we now have 63 territories as of March 31. And that allowed us to split actually some pretty big geographies that got a little unwieldy for 1 rep. And that’s a high-class problem when you had to have 2 reps in a city, and it also shows the growth of it. So those representatives are having impact. Now we used to say it takes 5 months to have to pay for yourself. What we’re seeing now, because people know about the test that, that could be a lot faster. So in 2 quarters, after we hire the new reps, we anticipate that they should be paying for themselves and then expanding it. So that’s a really good thing about the expanded territory. It gives us enough reach and frequency out there to cover most of the territories that we wanted to cover at this point. Now inside sales force is new to us. And I’ll tell you, Chris, I was suspicious about how well they could be. I don’t know if it’s COVID or what, but they’ve really been able to capture a lot of physician calls, doctors that are just too busy right now with the bolts of patients coming back. Our inside sales force is able to reach them, make sure they have the kits, the samples as whatever they need to be able to conduct their practice. We’ll continue to monitor that, but early indications say that this probably will not go away post-COVID because they are having a great extension of our existing sales force and reaching into these white spaces that, quite frankly, you’re not going to put a representative, perhaps, in Alaska for us right now or some other places. But they can reach there, and they can reach there and hit a lot of volume of call and deliver really strong core message. So early success we’ll continue to monitor it, but I don’t think it’s going to go away, Chris. I think even post-COVID, companies have now learned that this is a very cost-effective way to increase the reach and frequency of your sales team.

Our next question comes from the line of Kyle Mikson with Cantor Fitzgerald.

Congrats on the nice quarter. So I wanted to start with the all-time record volume in March. Just want to understand if that’s like a run rate through -- if you saw that in April, seeing in May? And just for background, what I’m thinking is like last week on Arena’s earnings call, they mentioned that 15% of rheumatologists intend to increase their prescribing of voclosporin in the next 3 months. And so I’m wondering if you’re expecting the kind of same level of increasing activity for the back end of the year and even the second quarter as well?

Yes. So yes, we are seeing consistency in April. We’re very pleased with our April number. I’m looking forward to being able to share that more detail for you. So it did carry through as far as just continuing. Doctors can continue to write the product and come back into practice. The 15% for -- I believe you said that it was for voclosporin. Of course, they’re coming off of a 0 so -- or close to it. So the percentages are a little wonky for them versus us, so it does 29,000 orders. But we are going to see more doctors coming back to work and practices opening up. I did read a report just recently that said that not all offices are open. There’s one thing really important to remember about these rheumatologists too. They have a capacity limit, 10 patients per day, maybe 11, but that’s a capacity limit. So when these bulks of patients come back, what they really need is the most convenient way to test them and get them out of the office and render decision as quick as possible in their disorder. And I think that’s where we come in the best because that’s what the doctors really like. They can write 1 CTD test and get the best lupus test, 11 generic markers, and -- instead of doing serial testing and having that patient come back over and over again. So I’m expecting us to continue to do well throughout the year. It’s -- there’s no doubt we have a solution here. I think the real key metric here, Kyle, 99% stickiness. That means when the doctors write our product 11x or more, the chance of them writing again is 99%. That’s an important metric because doctors don’t write something that they truly do not see the value of. So we think we have the right solution. And we expect it will continue, COVID or not. COVID does not cure lupus. These patients will be back in the office, and they’ll need a test to make sure they have the disorder before they put them on these expensive biologics.

All right. Ron, that was helpful. And I wanted to also ask 2 questions about the Allegheny partnership. First of all, I was wondering if -- basically, just why those patents weren’t originally acquired by Exagen from Royalty Pharma in Cypress a few years ago. I’m just kind of thinking like, what that lab in Pittsburgh just worked on these pants like the whole time and just kind of independently? And then a second note I wanted to ask was, are these potential assays, they’re going to be developing, and they’re going to be run using flow cytometry? Or that -- is that kind of like part of the multiomics strategy or could another detection platform be used for those?

Great question. We are really excited to work with Allegheny. They are a huge center of excellence. For autoimmune. So you want to partner with these huge centers of excellence. And for us, Allegheny is ideal. Dr. Ahern is just an amazing scientist, Dr. Sue Manzi, again, just a key opinion leader for -- around the world, really. So being able to partner with these thought leaders and with an institution that is so focused on autoimmune is really key for us. These new markers that he’s finding because he’s always tinkering finding new things, have different utility. We are examining each one of those for what these fragments will mean. And whether we use flow cytometry or some other technology or even something even more advanced, that’s all the things we’re looking at this point with these assets. Will it be part of the multiomic processes that we’re putting together? Could be, Kyle. Because what we’re looking at is adding the RNA marker to any of our protein markers. RNA tells you what’s going to happen, protein makes it happen. So when you have the 2 together, it just gives the doctor a more complete story of where that patient is. So center of excellence, outstanding, key opinion leaders, love it, and the fact that they have new technology. And they’re always tinkering with new stuff. So it’s good for us to be with the Center of Excellence because we’re getting the first look of everything that’s new that’s coming. One more thing that comes out of Allegheny, which I got to tell you, we live with well-characterized blood bank samples. That’s important for any diagnostic company to cover. So working with Allegheny, we feel we’ll get very pristine biobank samples for us to run our test on and have the most accurate test with the highest sensitivity and specificity needed for the doctors.

That was great. That was awesome. 2 really quick questions for me. So continuing with the multiomics theme, should we be expecting any milestones this year like studies or partners potentially announce? I mean, obviously, don’t get too detailed, I don’t want you to go there. But just should we be on the look-out for anything upcoming?

Well, we’re pushing to get a lot done. You’re right. There’s not so -- I got to -- I can’t share every detail with you. I can tell you that our team -- we’ve ramped up our R&D team. We’ve got all the right equipment. We’re working with the right partners. And stay tuned, Kyle. You’re going to hear good news. While I can’t lunar land on a day, I’m really confident with everything I’m seeing there and if you want to think of a time frame where maybe some of the stuff will come out, ACR, the American College of Rheumatology is one possible area. The other possible could be early next year. And while I can’t lunar land on a day, again, I’m not going to force my scientists to do anything that’s going to hurt the asset. I’m pushing as fast as I can without hurting the asset, but I’m really excited about the team we put together and what I’ve seen so far. So stay tuned, Kyle, we’ll give more information on that as it rolls out.

Perfect. And Kamal, on the testing revenue guidance, how are you thinking about the mix between the AVISE CTD, other testing revenue, just to the extent that you could share?

Yes. AVISE CTD continues to be our flagship product. It makes up approximately 85% of the testing revenue. So going forward, we anticipate monitor to continue to grow because -- that’s an annuity. So that one might grow at a little bit of a faster pace because you have patients that might take it 4, 6, 8 times a year. But CTD continues to be our flagship, especially with new writers that we bring on board. So as you know, we did add -- we had a record for a number of ordering health care providers, they usually start off with our AVISE CTD test.

Our next question comes from the line of Mark Massaro with BTIG.

This is Vivian on for Mark. So coming off of your payer wins last quarter. Just wanted to see if you could touch on any updates on commercial payer traction, and what it is that some of the big outstanding plans need to see perhaps some new papers or publications?

Okay. Great. Thanks, Vivian. Yes, we continue to work on that. As you know, we got the fourth largest Blue, Highmark. We got TRICARE. Now we’ve got TRICARE East and TRICARE West, which completes the story there. And we picked up, obviously, the fossies [ph] in California as well as the deal with Sonora Quest out of Arizona. So we can continue to move the ball forward. We’re also doing a lot with these major hospital centers like Tufts and Brigham and Women’s as well as Emory and St. Charles. So we’re working on all fronts. We feel that dossier tells the story of a better test that can more timely accurately diagnose these patients as well as be cost effective. So we feel that dossier really tells the story, and we’re getting in front of as many of these payers as we can this year. As you know, they have certain allotments at times where they look at different assets. So we’re in queue with a lot of the payers, and we continue to push that forward. What they’re really looking for us is longitudinal studies. And we’re putting -- we got we got a very good portfolio, if you will, of information to share with them once we have our meetings with them. So the keys there are -- we’re continuing to gain momentum. We have what we feel is the right asset. And something I’ll share with you, Vivian, is this COVID, if you’re going to look at something that came from that was this disparity issue really got elevated as far as women and people of color. Well, 8 out of 10 lupus patients are female, and lupus affects women of color disproportionately higher and more aggressively than Anglosso we think we -- that, along with the fact that we got the right test, should help us with these payers so they can help more patients and solve this disparity issue that’s taking place right now.

Awesome. And just a quick follow-up, maybe for Kamal. If you could potentially unpack the 2021 guidance a little bit, is that back half weighted at all?

Yes. What we’ve said in the past is we do anticipate to continue growing. So I would anticipate that every quarter builds upon itself. So based on your comments, yes, it would be more heavily weighted towards the back half because we’re going to continue growing and every quarter should be larger than the preceding quarter.

Our next question comes from the line of Paul Knight with KeyBanc.

You might be on mute, Paul.

Yes, sorry. The 67 reps. Was that the total here at the end of Q1?

63. So that was -- the end of the -- the expansion went from 60 to 63 territories. And we have 66 to 63 -- sorry, we’re -- 56 to 63 representatives -- territories.

56 was at the end of December, correct?

Yes, that’s correct for the number of territories that we had. We announced an expansion of territories to 63 in Q1 and that was an announcement. We started to hire them in Q1. So we ended Q1 with 60 reps.

Okay. Covering 63 territories?

Correct.

And then with this multiomics research that you’re embarking upon, Ron, does that ultimately mean in RA, could there be the possibility of a companion diagnostic as well? Or -- does that make sense?

Yes, it certainly does. I mean, there are products in the pipeline for autoimmune that are interferon-based, if you will. So could it be eventually? Down the road. I think what from pharma, though, they’re moving away from companion diagnostics, and they’re talking about their complementary diagnostic, no pun attended since we’re a complement company. But that means that it doesn’t have to be in the package insert, but there can be studies alongside that show how our test can identify the right patients where that product will work most efficiently. Without having to put it in the package in search, what it means you have to do the studies and go back to the FDA and so forth. So I’m seeing more companies move toward that complement rather than companion diagnostic for their test. But to answer your question, what we’re going to do is we’re going to develop the best multiomics test. And as you can tell, pharma is working on these highly sophisticated products to, so it should be very well dove entail with their launches as we are able to identify the right patients for these expensive biologics.

Ladies and gentlemen, we have reached the end of today’s question-and-answer session. I would like to turn this call back over to Mr. Ron Rocca for closing remarks.

Yes. Thanks, everybody, for joining the call and your continued support of Exagen. We really feel like we’re doing a great job here helping patients. And I think that’s the part we always have to remember. Our philosophy is if you put patients first, the quarterly numbers and the dollars have come together, and that’s our focus. As we always say here, if you help one autoimmune patient, you may not change the world. But you’ll change the world for that one autoimmune patient. And that’s what we stay focused on. We have high-quality science, great IP. And quite frankly, we have a channel here, which we dominate, and that’s the autoimmune channel, which is very big. And with rheumatologists really preferring us versus any other company that they work with that makes us feel outstanding, and we’re right positioned. Again, thank you for the call. We appreciate it, and we look forward to having this again for our Q2 earnings call. Take care. Have a wonderful day.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your evening.